Budget2011: Whiting “disappointed” at failure to review NI contributory principle

THE CHANCELLOR’S REFUSAL to review the contributory principle of National Insurance was a “disappointment”, tax director of the Office of Tax Simplification John Whiting has said.

In his Budget statement, George Osborne said that the government “will consult on merging the operation of National Insurance and income tax”. The simplification of the system will be a “huge task” that will take a number of years to complete, he said.

However, he said that this will not include extending NI to pensioners or other forms of income, or the abolition of the contributory principle. Tax experts have said that a full merger of the systems is highly unlikely.

Whiting, who is tax director of the Office of Tax Simplification, which recommended a full study of the systems, told Accountancy Age that there would be benefits from reform, even if it did not result in a full merger.

“We’ve been careful to set out various stages, to emphasise that a real difference can be made without going the whole hog,” he said.

“The one disappointment I have is that he has stopped short of looking into the contributory principle. It is not clear to what extent the contributory principle is necessary if we are moving a flat rate state pension.

“If we are having a study, shouldn’t we have a study of all aspects?” he added.

Bill Dodwell, tax partner at Deloitte, said that this stops short of the recommendations of the Mirlees Review, which recommended a full merger of the systems.

“What he is trying to do is retain NI as a separate tax,” he said. “The reason is to make sure this does not apply to pensioners or savings, harmonise the base for employment income and make NI cumulative.”

This was a “much more rational move” than a full merger, he added. This would avoid the imposition of further taxes on pensioners, which was a possible implication of the Office of Tax Simplification’s recommendations.

Colin Keane, senior director at Alvarez & Marsal, said the use of the word “operation” suggested that this could be an administrative reform, rather than a change to the fundamental principles of the two systems. He said there should be openness regarding the combined rate of NI and income tax.

Alastair Kendricks, tax director at Mazars, said it was likely this issue will “drift off the agenda” over the course of the Parliament.

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